By Shuli Ren

By now, VIPShop (VIPS) is by no means cheap. Credit Suisse initiated their coverage with a Neutral rating. Their $60 target price implies 71 times 2013 earnings and 38 times 2014 earnings. VIPShop last traded at $58, very close to the broker’s target price.

The pressure is on. To justify this valuation, Credit Suisse estimates that VIPShop needs to deliver an annualized 68% increase from 2013 to 2015.

That is tall order. On top of that, the broker thinks the market has somehow simplified VIPShop’s story to one of revenue growth. Since there is just so much incremental revenue you can milk out of an existing consumer, the only viable option is for VIPShop to grow its top, top-line number: active user base. Here are analysts Evan Zhou and Dick Wei:

Within revenue drivers, both per-order size and purchase frequency per-active customer have limited upsides, standing at US$32 and 3.15 times per quarter, respectively. The major driver for Vipshop’s topline growth is growth of number of active customers, i.e., its core fan base.

Although Vipshop’s quarterly active customer base of ~3.5 mn is still relatively low compared to other B2C retailers, we believe Vipshop’s core customer base, which enjoys bargain hunting and impulsive purchase,might be only a fraction of China’s total online shopping population of ~250–300 mn.

To grow its active customer base, Vipshop either needs to expand its traffic or increase its conversion and retention rates. Vipshop’s daily unique visitors already surpassed the 10 mn mark. Conversion rate stands at ~4%. We believe it will take time for Vipshop to improve conversion from current level, and incremental traffic growth may come at a cost from marketing dollars as the word-of-mouth effect fades over time.

While we do not see much risk on FY13 revenue, we see decreasing visibility in its active user base growth in 14E, which is the main driver for its topline. If active customer growth continues to slow down, we might see share price pressure on demanding valuation on top of decelerating growth. We also believe the market is assuming an over-optimistic scenario on Vipshop’s margin expansion potential for the next two years.

This stock has seen a spectacular rise this year, returning over 200% so far. But it does not lack naysayers.

Investors should VIPShop’s Internet traffic closely. A Macquarie report showed in June, VIPShop’s number of unique visitors dropped 20% month-on-month, even as the entire B2C market grew 5%, raising concerns that traffic to VIPShop may have peaked. “Stock should go back to 20’s easy. Scary for shareholders. Major decline,” wrote short-seller Citron Research in a Twitter message. Shares plunged 6.8% that day.

July and August may have been better. Deutsche Bank, which had downgraded VIPShop back in May, upgraded to Buy at $66 price target last week. The broker conducted channel checks with three Internet research firms (Omniture, iResearch and Hitwise) and concluded VIPShop’s Internet traffic rebounded since June, “significantly alleviating competitive concerns around the company and reaffirming long-term growth potential.”

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. The Barrons.com Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools.